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Inflation targeting and real exchange rates: A bias correction approach

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  • Kim, Jaebeom

Abstract

This paper examines whether inflation targeting (IT) influences purchasing power parity (PPP) by a bias correction approach under cross-sectional dependence. The recursive mean adjustment (RMA) method proposed by So and Shin (1999) and Shin and So (2001) is employed to correct a downward bias in half-life estimates of real exchange rates. More importantly, the empirical results show that IT lowers variability of real exchange rates and plays an important role in providing favorable evidence for long-run PPP.

Suggested Citation

  • Kim, Jaebeom, 2014. "Inflation targeting and real exchange rates: A bias correction approach," Economics Letters, Elsevier, vol. 125(2), pages 253-256.
  • Handle: RePEc:eee:ecolet:v:125:y:2014:i:2:p:253-256
    DOI: 10.1016/j.econlet.2014.09.019
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    References listed on IDEAS

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    Cited by:

    1. repec:bla:etrans:v:25:y:2017:i:4:p:663-680 is not listed on IDEAS
    2. Ouyang, Alice Y. & Rajan, Ramkishen S. & Li, Jie, 2016. "Exchange rate regimes and real exchange rate volatility: Does inflation targeting help or hurt?," Japan and the World Economy, Elsevier, vol. 39(C), pages 62-72.
    3. Ding, Hui & Kim, Jaebeom, 2017. "Inflation-targeting and real interest rate parity: A bias correction approach," Economic Modelling, Elsevier, vol. 60(C), pages 132-137.

    More about this item

    Keywords

    Inflation targeting; Recursive mean adjustment; Half-life; Cross-sectional dependence; Panel unit root; Real exchange rate;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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